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The 1 Thing Everyone Overlooks With Blockchain Technology

Forget this and your cryptocurrency investments could go up in smoke.

With few exceptions, the cryptocurrency market has been next to unstoppable since 2017 began. Though virtual currencies are exceptionally volatile, they've increased in value by roughly 3,900% to $703 billion between Dec. 31, 2016, and Jan. 15, 2018. Good luck finding any asset class that'll deliver similar returns in such a short period of time.

Blockchain technology takes center stage

Although there's a plethora of catalysts responsible for this rally in cryptocurrencies, including emotions, a weaker dollar, and an "unfair" market that tends to incentivize buying rather than selling, it's the emergence of blockchain technology that has deserved most of the credit.

Image source: Getty Images.

In its simplest form, blockchain technology is the digital, distributed, and decentralized ledger that underpins virtual currencies and is responsible for recording all transactions without the need for a third party. Its invention, and the reason blockchain went mainstream via bitcoin and now other cryptocurrencies, is to correct a number of perceived issues with the current payment system.

With today's banking system, transactions fees are believed to be higher than they should be as a result of banks acting as intermediaries during transactions. Furthermore, transaction settlement times, especially for cross-border transactions, are viewed as inadequate. If a payment is sent to an overseas bank, it can take between three to five days for that payment to be validated. Blockchain developers and some consumers simply feel this isn't efficient.

Blockchain helps resolve these three primary payment system flaws

Blockchain aims to resolve the three biggest issues with the current banking systems. First, payments processed over blockchain have no intermediary involvement, meaning with fewer mouths to feed, so to speak, transaction costs should be lower.

Image source: Getty Images.

Second, transactions speeds are considerably quicker when processed through blockchain. Ripple claims that its transactions can settle in around four seconds, with others, such as Stellar, claiming processing times of two to five seconds. Imagine cutting a cross-border transaction that used to take days to clear down to a mere matter of seconds.

Finally, blockchain is decentralized, meaning there's no one party that maintains majority control. It also means that cybercriminals won't be able to attack a single data center in order to bring a cryptocurrency to its knees, making blockchain a potentially safer choice than current payment networks.

It's about much more than the financial services industry

We're already witnessing a number of partnerships where blockchain technology is being deployed. IBM(NYSE:IBM), for instance, has been among the first adopters of blockchain technology for payment processing. It announced a partnership with Stellar in October to utilize its blockchain technology in a dozen banks in the South Pacific region. The idea being that IBM generates tens of billions of dollars from overseas customers, and that the payments it receives from these customers in different types of currencies can take days to settle. When processed through Stellar's blockchain, these payments settle almost instantly.

Image source: Getty Images.

Additionally, we're witnessing companies develop their own proprietary blockchains. In late August, six global banks, including Barclays and Credit Suisse, decided to band together to create their own virtual "utility settlement coin" and accompanying blockchain technology.

It's worth noting that we're also moving beyond the mindset that blockchain is a currency-only application. Dow Jones Industrial Average component Cisco Systems(NASDAQ:CSCO), one of 200 organizations that are currently part of the Enterprise Ethereum Alliance, is testing a version of Ethereum's blockchain technology in some capacity. The company is also developing its own blockchain to identify different connected devices, monitor those devices, and evaluate how trustworthy those devices are when connected to a network. In other words, it's adapted blockchain to the Internet of Things.

The one thing everyone is overlooking with blockchain

However, there's one pretty glaring issue that most folks and investors are completely overlooking when it comes to blockchain: It's been around for roughly a decade and is only now being tested in demo and small-scale projects.

Image source: Getty Images.

Cryptocurrencies like Ripple and Ethereum are sporting market caps of $62 billion and $121 billion, respectively, because enterprise customers have jumped at the chance to test their blockchain technology. But the key word there is "test." With the exception of IBM's Stellar partnership and Ripple's partnerships with American Express, Banco Santander, and MoneyGram International, there are very few real-world tests of blockchain currently ongoing. What this suggests is that it's going to take a long time before we see any significant adoption of blockchain in financial service and technology-based industries. This isn't to say that there isn't a future for blockchain, so much as that there are obstacles still to deal with regarding its implementation.

For instance, one of the biggest objections that blockchain developers are liable to encounter is that blockchain isn't particularly compatible with current payment network infrastructure. This means having to almost start from scratch, which is a time-consuming and expensive project. It's something that enterprises are unlikely to undertake until there's certainty that blockchain can be scaled to handle the sheer amount of transactions that current financial networks are processing.

Another problem is that the barrier to entry among cryptocurrencies is exceptionally low. We've been witnessing between 50 and 100 new virtual currencies hitting the market every month, each of which likely has its own proprietary blockchain. It's quite possible that today's most revered blockchains could become yesterday's news, and no businesses want to be stuck with inferior technology.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong